US earnings: as good as it gets

US earnings have had their best quarter since 2010, when they were bouncing back from the financial crisis.

Andrew Van Sickle
By
published
in Features

897-us-earnings

US firms are enjoying rising sales and pricing power
(Image credit: Credit: Elizabeth Wake / Alamy Stock Photo)

US earnings have had their best quarter since 2010, when they were bouncing back from the financial crisis. The members of the S&P 500 index increased their earnings by just over 26% year-on-year in the first quarter of 2018, bolstered by the introduction of corporate tax cuts, a weaker dollar, and healthy worldwide growth (around half the index's sales are made outside the US).

Nonetheless, the first quarter will probably be "as good as it gets", says Justin Lahart in The Wall Street Journal. The impact of the tax cuts will gradually fade, and the dollar has strengthened too. The profit growth estimates for the next three quarters are around 20%, slowing to 6.5% in the first three months of 2019. Valuations are also already sky-high, so the scope for impressive profit growth to boost stocks looks limited.

One of the hallmarks of this cycle is historically stretched profit margins. But now we are seeing the highest percentage of firms raising wages and prices since the 1990s, says John Authers in the Financial Times. That doesn't mean margins must fall at once. Indeed, companies are growing sales, and growth bolsters pricing power, so firms will take the opportunity to widen margins. But again, the scope for profitability to provide equities with much further impetus is limited.

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As the impact of earnings fades, interest rates are becoming more important, says Lahart. That's not good news for stocks. The tight labour market and signs that "inflation is warming up" have driven the yield on the ten-year Treasury bond to just over 3%, a near-seven-year high. That increases the relative appeal of bonds compared with stocks and in the meantime, the danger of unexpectedly quick interest-rate rises as inflation jumps still lurks in the background.

Andrew Van Sickle
Andrew Van Sickle
Editor, MoneyWeek

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.

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